Clear Eyed Capitalist

Archive for March, 2007

Last fall at the Boston Investors Circle meeting I went to the panel on social returns – Michael Rozyne of Equal Exchange was there, as was Sara Horowitz from Working Today. Sarah asked the question: what’s up with the 5-8% return markets? Because those are the kinds of returns she and Michael can offer. So we had a bit of a debate about it but seems the difficulty is there’s not much capital there. Michael noted that Equal Exchange has built their investor base one investor at a time – it’s all relationship investing. The trick seems to be how do you grow a company to a size that outstrips relationship investing when the only measurement we have to judge success in the absence of a direct relationship is financial measurement? Perhaps with a cap of 500 investors (what they face as a co-op) that will keep you within the realm of relationships anyway, but I’d imagine the slow growth has also been important to managing that.

I think a growth mission is part of changing the world, and equity seems to be a very important part of that mix because it acts as a debt complement and because it doesn’t require immediate servicing. So the alteration of vision seems to come with capital market access, that there’s none if you offer less than a 10% return, but increasing shareholder return sometimes seems to require taking it out of the pockets of the other stakeholders: Sarah noted that the only way she could improve the return for investors on her worker insurance plan would be to charge the workers more. So how do we expand capital markets so less lucrative business models can get capital?

The angel dartboard model requires a possible 30x return so all those bad gambles that simply fail can balance out to the desired return. So maybe we need to start with improved risk assessment. Perhaps that’s what we had when there was more institutional investment. The doing well by doing good model seems to imply that you only need the correct business model and you’ll be able to attract the capital you need even if your goal is to provide good employment and benefits to normally low wage workers, but I’m not sure I’m a believer yet.

March 17 – I am not alone in asking this question: my friend Elise directed me to a conversation on the Social Edge website about the lack of expansion capital for social enterprise.